Every business needs money to operate and grow and your art business is no exception. It is important that you have a basic understanding of the various ways to finance a business that are available. Most artists start(finance) their businesses with their own or borrowed funds and use the money generated from sales to fund future activities. For some artists these funds are not sufficient to fund their growth plans or other obligations and they need to raise money.
In this article I will explore the common ways to finance a business. You don’t need to go to business school to understand the basics of business financing. Learn the basics and you are well on your way to keeping your art business viable and growing! In a future article I will take a look at other financing methods such as grants, fiscal sponsorship and crowdfunding.
Why you may need financing
There are many reasons why you may need to finance your business. You may need extra capital for a short time or your need for financing may last many years. A few examples are:
- Purchase a new studio or building
- Purchase new equipment or supplies
- Fund living and travel expenses for a new project
- Pay back high interest loans
- Provide working capital for operations such as marketing, rent, employee expenses, etc.
The two major types of financing
There are many ways to look at business financing and one of the most basic ways is to categorize financing into two groups: Your Money, and Other People’s Money (OPM). Most every business starts with using the owner’s or founder’s financial resources. As the business grows this “seed capital” may be sufficient but for many businesses additional capital is needed.
Most businesses are started with the founder’s own funds and a passion for an idea to make and sell a product or service. Art businesses are no different. Keep in mind that the profits you make from selling your art that are “plowed” back into your business are also a form of financing. Some of the common sources for financing with “your” money include:
- Savings and investments
- Money generated by your business in the form of profits – “bootstrapping”
- Financing from income earned from other jobs or careers
- Gifts given to you
Other people’s money (OPM)
At some point in time your art business may need more financial resources than can be generated from sales and owner’s contributions – at this point you will need to look outside your business for financing. When you use other people’s money it comes with responsibility, conditions and restrictions unlike “your money” where you can do with it as you wish.
Friends and Family
In addition to your own funds, friends and family are a common source of financing small businesses. These may be in a form of a loan or an ownership stake or even an outright gift.
Equity Financing or Selling an Interest in Your Business
Think of equity financing as selling stock in your company or getting a partner(s). This type of financing will only work if you are a corporation or partnership. You cannot sell stock nor have a partner if you are a sole proprietorship. This type of financing takes time to arrange and you will need formal agreements between shareholders and/or partners. When you sell an interest in your business either in the form of stock or a partnership you may have to give up some of the control of your business. Choose your partners and shareholders carefully!
Debt financing is usually in the form of a loan to your business. Examples include:
- Real estate loans that are usually long term in nature for periods of 8-30 years
- Equipment loans that are usually for terms of 3-10 years
- Working capital loans provide money for operating expenses such as rent, salaries and materials and are usually short term.
- Lines of credit
- Unsecured sources of credit such credit cards
With most every type of debt financing you will probably have to personally guarantee the loan and the loan may be secured by the property (car, building, equipment) you borrowed to acquire, your accounts receivables and inventory or other assets. Even if you are a corporation you may be still be required to personally guarantee the loan.
Leases / Renting
Leases are typically provided for buildings, office space, studio space, equipment, and vehicles. With a lease you are not purchasing an asset such as a studio space or equipment, you are only paying for its use for a specified period of time. Your monthly payments will usually be lower with a lease than a loan for purchase, but remember that at the end of the term for the lease you have no ownership in the leased asset. Many leases may also have a provision where you can buy the asset at the end of the lease for what is called the “residual.”
Trade financing is where your suppliers give you short term credit to make purchases. Typically trade financing is used to finance materials, supplies and some operating expenses. This type of financing is usually 30 to 90 days and will show up on your balance sheet as an accounts payable item.
You may need a financing package
Before you look for financing you will need to prepare some type of bank or financing package. Your financing package will describe your business, the funds you need and why, and how you will pay back the loan or provide a return to your investors/partners. If you have developed a business plan and have prepared financial projections you are well on your way to creating a financing package. The key elements in a financing package include:
- Your business plan
- A story that will convince the lender or investor that you have a good chance of succeeding in your art business venture
- Why you are seeking financing, what the funds will be used for, how and when you are going to pay them back
- Financial projections showing the cash coming into and out of your business and an ability to make payments for your loan
The bottom line(s)…
- Financing is the life blood of any business. The amount of funds you have available to run and grow your business will have a great impact on your success.
- You will need a decent business plan and financial projections to help you determine your financial needs and your ability to pay on loans or leases.
- Develop good relationships with your banker and other financial advisors such as your accountant or lawyer. Consult them before you get into any financing situation and make sure you understand what you are getting into.
- Your financing may also affect your tax situation. Be sure to consult your tax advisor prior to entering into financing agreements so that there will be no surprises when it is time to file your taxes.
- The best time to apply for a bank loan is when you don’t need the funds. Be sure to get the process moving forward early.
- Take advantage of the many resources available to you such as the Small Business Administration (SBA), SCORE as well as programs offered by local colleges and organizations – many are free!
If you would like to learn more about building your art business and selling more art I invite you to check out my book – The Artist’s Business and Marketing ToolBox. Good Luck!
Neil McKenzie is the author of The Artist’s Business and Marketing ToolBox – How to Start, Run and Market a Successful Arts or Creative Business available in softcover from Barnes & Noble and Amazon and as an eBook from iTunes, Amazon and Barnes & Noble. He has developed and teaches the course “Artrepreneurship” at the Center for Innovation at Metropolitan State University of Denver, and is also a visiting professor at University College at the University of Denver where he teaches “Marketing the Arts”.
Neil has over 30 years’ experience as a management consultant and marketing executive, working with some of the world’s top brands. Neil is a frequent lecturer to artists and arts organizations, a guest columnist for Colorado Biz Magazine, where he covers the creative sector of the economy, and the author of several articles for Americans for the Arts, a national arts organization. Follow Neil on Twitter: @neilmckenzphoto